Microeconomics 2nd Edition by Douglas Bernheim

Exercise 5

Bill owns an outdoor amphitheater in which he stages rock concerts. Because audiences like loud music, his profits rise with the decibel level, D , of the concerts, at least up to a point. More specifically, his profits are P = 120,000 D 500 D 2. Unfortunately, the noise from the concerts bothers 100 residents who live nearby. The cost to each resident (expressed in dollar terms) is
How loud will the concerts be without regulation or a corrective tax (assuming the problem is not resolved through private negotiation) What is the efficient noise limit What is the efficient Pigouvian tax